Thread by @iang_fc

Everyone’s writing about Tether at the moment, so why not join in the noise.

They announced that about half of their reserves are held in commercial paper, which is a short term loan to some company, good for the money, on some future date. So far so good. 1/12

The rosy picture: a buyer of Tether turns up with $$$, and purchases in good faith the same amount of USDT. The system then places that $$$ into its reserves. The $$$ are then lent to a company in exchange for commercial paper. Which is paid back in due course with $$$. 2/12

While good accounting, I see 3 potential flaws. (1) Will the company pay back? Of course, some might not. Let’s say 2% do not- this is covered as Tether actually sports more reserves than issued units of USDT, and the commercial paper pays a competitive rate of interest. 3/12

That works in a benign, static economy. But it didn’t work in the GFC - in that event, the banks held mortgages which they securitized and sold. When the mortgages went south, all the banks went broke. Why? 4/13

Because although they had sold their securitized loans onto the market and therefore got rid of their risk, at the same time, they were buying them back from other banks. They said that securitization reduced risk, but they’d had their cake and eaten it too. Big mistake. 5/13

How would Tether enter into this merry form of mutual suicide? It would lend to like entities.

If it took its $$$ and lent it to other exchanges eg Binance, Kraken, Bitfinex, in exchange for commercial paper, then the accounting still works, but the systemic risk goes up. 6/13

Way up- in essence it means that a shock to all the exchanges, eg one that causes broad USD redemption, will rapidly cause the exchanges to close their doors. And at that point they are illiquid. The first into court wins, Insolvency follows soon after, then bankrupcy. 7/13

And then, or well before then bc the music already stopped on that commercial paper, Tether is now also illiquid and USDT is no longer acceptable. Give me hard dollars. 8/13

(2) Second problem with this is that notion of dollars for commercial paper. In the rosy picture, real dollars turn up, and get turned into Tether. Now if the commercial paper is then placed with the same exchange, that exchange has now bolstered its working capital. 9/13

But the dollars have returned back to the exchange! And so have the Tethers! The accounting works, but it changes the balance sheet of the exchange bc capital is now easy to acquire - just borrow it from Tether. Accounting-wise fantastic, but systemic risk supercharged! 10/13

(3) The third problem is that we can even optimise that (2) above - I as an exchange go to Tether and say, look, I’ll give you the commercial paper, you just give me the USDT - you know I’m good for it. And in effect this is an easy deal. No dollars need apply! Woot. 11/13

Accounting-wise this still works, but we’ve now entered fractional banking land, Tether is effectively lending out money without a reserve ratio. And to near related parties, which is something that banks should know not to do. 12/13

Therefore we need two questions answered:

- Does Tether lend against commercial paper to any crypto-related entities?

- And, does Tether lend USDT against commercial paper?

If the answer to either of those two questions is YES, then cryptoland has a problem. 13/13

And see this thread from @finhstamsterdam for the regulatory context, as it extends back to the 1994 report on pre-paid cards which started the ball rolling:

https://twitter.com/finhstamsterdam/status/1393845889588989954

It turns out, history can explain some things ;-)

@finhstamsterdam News just in:

Tether is Setting a New Standard for Transparency — And Responding to Criticism That is Untethered From Facts

stuarthoegner.medium.com/tether-is-sett…

from @bitcoinlawyer, GC for Tether (I think)

@finhstamsterdam @bitcoinlawyer On q1 - are any crypto-related entities issuing this commercial paper?

“Accordingly, wild speculation that this includes commercial paper issued by crypto exchanges is absolutely false; no such commercial paper, if it exists, is held by Tether.”

I’d say that is a NO.

@finhstamsterdam @bitcoinlawyer Good info on the fiduciary deposits which go through banks. This seems to me to be as good as cash at bank, raising that number from around 4% to close to 28%

Comments?

No word on Q2, but here’s promise. Keep the facts coming!